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Daily Alert - 5/26/20

This food distributor beat analysts’ EPS forecasts by a penny last quarter.

This food distributor beat analysts’ EPS forecasts by a penny last quarter. The shares have an annual dividend yield of 3.42%, paid quarterly.

Sysco Corporation (SYY)
From Personal Wealth Advisor

I plan to play the restaurant resurrection similarly to how we played the airline resurrection. I plan to play it not with a front-end provider, but with a back-end supplier (like Boeing with airlines).

I recommend playing the restaurant resurrection with the leading food-service provider SYSCO Corp.

SYSCO is the distributor king. Annual revenue, driven by the restaurant business, exceeds $60 billion. The company distributes a wide array of food products: frozen foods, fully prepared entrees, fruits, vegetables, canned and dry foods, fresh meats, dairy, beverage products, and imported specialties. It also distributes paper products, tableware, cookware, restaurant and kitchen equipment and supplies, and cleaning supplies.

Size, as so often the case, confers advantages. The $300-billion U.S. food-service market is low-growth but highly fragmented. Thanks to its heft and financial resources, SYSCO moves the needle buying competitors on attractive terms. It typically completes several acquisitions each year.

Acquisitions have kept revenue growing at a 5% average annual rate over the past 10 years. Earnings per share (EPS) have grown at a 7% average annual rate over the same period. EPS growth has outpaced revenue growth on incremental efficiency gains. The annual operating margin has expanded by 50 basis points over the past five years. SYSCO aggressively repurchases shares. Earnings growth has been concentrated on fewer shares.

Growth, as you might expect, will take a holiday in fiscal-year 2020 (which ends June 30). Because of the government-mandated comatosing of the economy due to the COVID-19 virus, revenue will likely drop 8% for the year (to $54.4 billion). EPS will ease 9% (to $2.92).

It hasn’t all been downhill since March. SYSCO’s healthcare food business (8% of revenue) is up more than double digits over the past couple of months. Within its government and education segment (9% of revenue), the education side of the business has softened due to school closures but, the government business is more stable.

Management anticipated the rough patch when the lock-downs were announced. Liquidity has been bolstered by an incremental $4 billion bond offering. Management intends to use the bond proceeds to repay commercial paper outstanding and for general corporate purposes (dividend support being one).

Management indicated that even under the most draconian downturn, the company has the financial resources to weather this storm.

Most companies reflexively cut costs when business contracts. SYSCO is no different, though it has taken the process a step forward. It also has exploited the downturn to right size its expense structure. Cost cutting includes temporary furloughs as well as permanent reductions in force. Permanent route efficiency gains have also been achieved.

SYSCO is uniquely positioned among food-service providers to build market share in a post-COVID-19 world. The sales team is already working to tap new accounts while expanding existing ones. SYSCO’s scale and liquidity should yield a relatively rapid rebuild of operations and inventory.

SYSCO is the dominant player in an essential industry. It sports the strongest balance sheet in the business. It can boast of a long record of generating value for shareholders through continual share buybacks.

SYSCO has generated additional value is generated through the dividend. SYSCO has 49 years of annual dividend growth to its name. The dividend has grown at a 9% average annual rate for the past 10 year.

SYSCO shares were trading near $85 when we entered 2020. They trade near $55 today. They trade at a 35% discount to blue-sky expectations at the start of the year. The sky is clouded today. The short-term outlook is uncertain. The sell-off in SYSCO shares since the country-wide lock-down began in March has lifted the starting dividend yield to a high by historical norms.

Long-term, we know the restaurant industry will be resurrected (even if all participants won’t be). SYSCO’s fortunes will be resurrected, as well. Indeed, management this week mentioned that business is already improving.

The more the outlook improves, the higher the share price will rise. I expect SYSCO to post incremental improvement through the second half of the year as the economy continues to open to more businesses.

I have a $69 per share 12-month price target. My price target assumes SYSCO’s outlook will improve sufficiently heading into fiscal-year 2022 (July 2021) to warrant the historical average 18.9 multiple to forward earnings. I expect EPS to post at $3.10 for fiscal-year 2021 and $3.65 for fiscal-year 2022. The multiple applied to expectations for next gives us our price target and our opportunity today.

Suggested Action: Buy SYSCO Corp. shares up to $59.

Ian Wyatt and Stephen Mauzy, Personal Wealth Advisor,, May 6, 2020